How does hire purchase work?

When buying a car, you can either sit down with a dealer to work out an HP deal, or apply online through a site such as Confused.com.

As mentioned, you’ll usually need to pay an initial deposit – this is typically around 10% of the full value of the car. After this, you can drive the car while you pay off the remainder of its value plus interest via monthly instalments.

HP contracts tend to be between one to five years.

What's the difference between hire purchase and a loan?

The main difference is that if you’re taking out a loan the car is yours as soon as you buy it.

You obviously still need to repay the loan, plus any interest. But it’s not secured against the value of the car, meaning the car will be yours from day one.

With HP, on the other hand, the car isn’t actually yours until you’ve made the final payment.

What happens at the end of the finance deal?

Some car finance agreements require a one-off final payment too, similar to an admin charge, in order for you to secure the vehicle.

This should be made clear from the outset.

As the owner of the car you'll then be able to do with it as you please.

What happens if I miss a payment?

If you miss a payment you may be able to come to some sort of agreement with your HP creditor.

For example, you could be allowed to pay off the outstanding amount over a set period time, or even extend the agreement. However, this is not always the case and, in some circumstances, your car can be repossessed (see below).

This means it's worth checking how missed payments are dealt with before you sign up to any deal. As a form of credit, it’s also worth knowing that missing an HP payment may also harm your credit profile.

If you have paid off less than one-third of the hire purchase price, the car finance company can take back the car without taking legal action against you. If you have paid more than one-third of the hire purchase price, a lender cannot repossess the car without taking legal action against you.”

Can I cancel an HP agreement before the final payment?

It's worth knowing that many HP deals allow you to terminate the agreement before the final payment is made.

In fact it's provided for by law in the Consumer Credit Act 1974, section 99, and should be noted within your contract.

As a result there are some fairly standard circumstances under which you can cancel.

For example, many agreements say that as long as you’ve repaid 50% of the total amount, which includes any interest, you can end the agreement and give the car back.

Confused.com, 3rd Floor, Greyfriars House, Greyfriars Road, Cardiff, CF10 3AL, United Kingdom
Confused.com is a trading name of Inspop.com Limited and is authorised and regulated by the Financial Conduct Authority

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